www.iifdc.org
Wayne, PA 19087
Letter from Geneva
April 2008
Phone: 610-687-8836
Although it is a congenial
assignment, there is always some
hesitation. As home to many
international organizations
Geneva is a fascinating city, and
when the weather is clear and
sunny, it can be spectacularly
scenic. When the international
bureaucracies grind slowly and
the weather turns nasty, it can be
extraordinarily dull and gloomy. Mont Blanc commands the skyline above Lake
Geneva, but only inveterate optimists expect this glorious view on any particular visit
to Geneva.
760 Red Oak Terrace
INTERNATIONAL INSURANCE FOUNDATION
Every year for the last twentyfour, the Geneva Association
(officially the International
Association for the Study of
Insurance Economics) has
conducted a seminar dealing
with insurance regulation and
trade issues. Every year for the
last ten, I have traveled to
Geneva to take part.
Inveterate optimists left their legacy in the proliferation of international
organizations with headquarters in Geneva, starting with the International Red Cross
and including several UN organs, such as the World Trade Organization. Although
conceived after the Second World War, along with the World Bank and the
International Monetary Fund, to reestablish the global economy, the WTO took shape
only in 1995 when the nebulous General Agreement on Tariffs and Trade finally
secured a general agreement that it should have a permanent organizational structure.
This agreement resulted from the Uruguay Round of negotiations, so named because
the negotiations began in Punta del Este, Uruguay, in 1986. Previous rounds of
international negotiations, especially the Kennedy Round in the 1960s and the Tokyo
Round in the 1970s, produced agreements to lower tariffs and other trade barriers
across the board for all the signatory countries. Partly for this reason, international trade
expanded over a hundredfold in the decades since.
Tariffs originated centuries ago as a revenue source, not as trade policy. Anyone
who has waited in the airport customs line when arriving in another country knows
that high tariffs distort trade and sap the efficiency of the economy. Governments
hesitate to reduce tariffs, however, because they fear their trading partners might not
reciprocate. Moreover, since every economic change produces winners and losers,
they face certain criticism from the disadvantaged sector at home.
Multilateral negotiations enable governments to coordinate the reduction of trade
barriers and thus strengthen the political support for sensible economic policies. Thus
WTO members subscribe to the principle of progressive liberalization. Each round of
negotiations becomes harder, however, because they involve more issues, as well as
more participants and more constituencies.
While the early rounds dealt only with barriers to merchandise trade, the Uruguay Round
introduced trade in services into the negotiations. The resulting General Agreement on Trade in
Services (GATS) established basic norms for services trade and imposed transparency requirements.
As stated in its Preamble, the GATS is intended to contribute to trade expansion "under conditions of
transparency and progressive liberalization and as a means of promoting the economic growth of all
trading partners and the development of developing countries." All Members of the World Trade
Organization are signatories to the GATS and assume the resulting obligations. Article XIX commits
them to further rounds of services negotiations. The first such Round, which started in Geneva in
January 2000, was incorporated along with agriculture and implementation issues into the negotiations
launched in Doha in November 2001. To emphasize the role of developing countries, these
negotiations are called the Doha Development Round. Trade ministers met again in Cancun and Hong
Kong, and between ministerial meetings the negotiations continue in Geneva.
Traditionally the Geneva Association seminar offers a worthwhile informal exchange of views on
global regulatory issues, but the final day adds the insights of participants in the ongoing negotiations
in Geneva. Usually the ambassador of a key country in the negotiations summarizes their current status
and suggests that a services agreement is still possible, no matter how many deadlines have already
been missed. It is only that developing countries lacked the time and resources to master the technical
complexities that services present, or that services are being held hostage to agriculture, or that India
or Brazil must learn a new leadership role, or that given enough time the negotiations will ultimately
succeed regardless because failure would be unthinkable. Diplomats, after all, are professional
optimists.
This year’s event ran true to form, with cogent presentations on solvency, group-wide supervision,
policyholder protection funds, and new reinsurance centers. Michel Flamée, who chairs the Executive
Committee of the International Association of Insurance Supervisors (IAIS), spoke glowingly about
future supervisory cooperation based on IAIS standards. The other speakers competently described bits
of the world as it is. But on the afternoon of the second day I felt as though the clouds had lifted over
Mont Blanc and I should take another look at the whole Geneva scene.
Over lunch Julian Metcalfe, the British Deputy Permanent Representative in Geneva, assured us
that the prospects for a services agreement had improved of late. Among several reasons, he pointed
to the extent of autonomous liberalization that has occurred because developing countries now
recognize that financial services contribute to their economic development. Even an agreement that
simply turns these recent policy changes into binding commitments would constitute significant
progress since the last round.
During the question period that followed, one of his compatriots complained that binding
commitments to existing policies offered no new commercial value for British insurers. My reaction
was quite different, since furthering global standards for insurance markets is the mission of the
International Insurance Foundation. Sound prudential supervision of competitive insurance markets
promotes economic development, and every affirmation or endorsement, no matter how redundant,
strengthens the global consensus. And as Ambassador Metcalfe replied, existing policies can be
revoked more easily than treaty obligations.
As Counselor in the WTO Trade in Service Division, Juan Marchetti stays close to the negotiations.
His seminar presentation confirmed the growing recognition within Geneva circles of the contribution
insurance makes to economic development. The supporting research he cited included three papers
I had sent him last year, including two by the International Insurance Foundation’s Research Director,
Dr. Ian Webb.
Reassured that the IIF has been on the right track, I glimpsed the way forward thanks to Paul
Myler, the Australian diplomat who chairs the WTO Committee on Trade in Financial Services. After
alerting us that his remarks did not represent Australian government policy, he recited some of the
obstacles to a services agreement so far. Not only had the proponents of financial services liberalization
lacked the tools to make their case, they had not articulated clear objectives. Differences in the
regulatory frameworks advocated by the U.S. and the EU clouded the common vision. Technical issues
require the expertise of national regulators, who have not been much involved. And the “prudential
carve-out” is a black box.
That black box arises from Article 2, section a, of the GATS Annex on Financial Services, which
provides that:
Notwithstanding any other provisions of the Agreement, a Member shall not be prevented from
taking measures for prudential reasons, including for the protection of investors, depositors, policy
holders or persons to whom a fiduciary duty is owed by a financial service supplier, or to ensure the
integrity and stability of the financial system. Where such measures do not conform with the provisions
of the Agreement, they shall not be used as a means of avoiding the Member's commitments or
obligations under the Agreement.
Understandably the meaning of “prudential reasons” is not obvious, and protectionist reasons
might easily be disguised as prudential despite the admonition to the contrary. Inevitably trade disputes
will center on this term, unless a new agreement gives it more precision. Formerly I argued that global
regulatory issues should be settled in Basle, not Geneva. Now I realized that Geneva is scarcely aware
of what has happened in Basle since the GATS Financial Services Annex was concluded in 1997. As
a fledging organization in 1997 the IAIS devised a weak set of Core Principles, but substantial overhaul
since then has strengthened them immeasurably. Countless self-assessments, training programs, and
Financial Sector Assessments have so
reinforced the global consensus
surrounding the Core Principles that
“prudential reasons” now has a clear
meaning in Basle circles. It is time
for Geneva and Basle to come
together, perhaps with help from
Berne and Zurich, to establish an
effective global framework for trade
in services.
Coming together means
changing habits, or at least
perspectives, to see the whole
picture. Insurance supervisors
generally avoid trade issues, which
they regard as political and therefore a threat to their independence. Trade negotiators rarely possess
specific technical knowledge of regulatory issues. Industry representatives tend to focus on commercial
advantage. Consumer advocates suspect that unequal bargaining positions may lead to unfair
outcomes. On cloudy days in Geneva, it is easy to lose sight of the real objective: a global system of
rules that work for everyone.
While regulators and negotiators clearly need to cooperate, industry can do more to articulate the
advantages of competitive insurance markets for developing countries. Traditionally suppliers of
insurance services have not emphasized the value they offer in ways that fit the logic of trade
negotiations. An industry whose prices can fluctuate widely from year to year and that compensates
its producers mostly by commissions obscures its core value. When outsiders to the insurance business
have difficulty imagining how insurers earn their profits, a comparative advantage in the provision of
insurance services goes unrecognized.
Gains from trade happen just as much in services as in goods. Some firms are more efficient
providers of financial services because they possess unique professional skill and can exploit
economies of scale. The unique skill of insurers is the identification, pricing, underwriting, and
monitoring of risk. Over time competition stimulates ever increasing efficiency, which for society as
a whole means treating the same risks at lower and lower cost. It also creates incentives for greater
safety, and therefore increased productivity.
But because of the fragile capital structure of financial firms, prudential supervision is essential to
give potential customers the confidence to buy financial products. Add substantially more risk and
what is true for banks becomes even more true for insurers. Transparent, non-discriminatory prudential
supervision provides a clear set of rules within which an insurance market can flourish. Global
standards improve the quality of prudential supervision because they lead to more transparency, more
consistency, and therefore more effective implementation. The industry benefits because compliance
costs diminish. Consumer awareness and confidence in supervision increase as nations coordinate
their approach to supervision.
The way to advance the Doha Development Agenda is to open the black box with an unrelenting
commitment to transparent prudential supervision in compliance with global standards. In 1997 the
prudential carve-out strengthened the hand of regulators; now its imprecision weakens their hand. As
global standards emerge, their incorporation into WTO commitments facilitates their implementation.
Synchronization of standard-setting and trade liberalization can lead to an open, fair, rules-based
multilateral framework for trade in services.
With a sound global regulatory framework in place, the world economy can transfer risks more
efficiently. Insurance markets will flourish, giving more people access to products that protect their
assets and stabilize their incomes. Incentives to manage risks better will allocate resources more
efficiently, and economies will grow. This boost to development is the promise implicit in the GATS
Preamble.
Flying out of Geneva, I could see the lake and the
mountains, the old city and the new, the offices and the parks,
all at once. Then I closed my eyes and imagined the scene
somewhere, anywhere, in the aftermath of a terrible storm
with claims adjusters distributing insurance payments to help
people rebuild their damaged homes. Few homes were
severely damaged, however, because most people had
previously reinforced their roof straps in order to lower their
insurance premiums. Meanwhile with only slight disruption
the government authorities continued to focus on improving
the health, education, and general welfare of their citizens. Of
course I am an inveterate optimist.
Robert Gibbons
Executive Director and President
International Insurance Foundation